Question

4.13 Business Ethics Warren and Kristina Mahaffey were approached by a salesman from the Five Star Solar Screens Company (Five Star). The salesman offered to install insulation in their home at a cost of $5,289. After being told that the insulation would reduce their heating bills by 50 percent, the Mahaffeys agreed to the purchase. To pay for the work, the Mahaffeys executed a note promising to pay the purchase price with interest, in installments. The note, which was secured by a deed of trust on the Mahaffeys’ home, contained the following language: “Notice: Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds thereof.” Several days after Five Star finished working at the home, it sold the installment note to Mortgage Finance Corporation (Mortgage Finance). There were major defects in the way the insulation was installed in the Mahaffeys’ home. Large holes were left in the walls, and heater blankets and roof fans were never delivered, as called for in the purchase contract. Because of these defects, the Mahaffeys refused to make the payments due on the note. Mortgage Finance instituted foreclosure proceedings to collect the money owed. The Mahaffeys alleged that the Federal Trade Commission rule protects them and allows them to assert the defense of breach of contract by Five Star against the enforcement of the note by Mortgage Finance. Did Five Star Solar Screens Company act ethically in this case? Can the Mahaffeys successfully assert the defense of breach of contract by Five Star against the enforcement of the note by Mortgage Finance? Mahaffey v. Investor’s National Security Company, 103 Nev. 615, 747 P.2d 890, Web 1987 Nev. Lexis 1875 (Supreme Court of Nevada)

Answer 1

Answer

Mahaffey entered into home insulation contract and agreed to pay for the work by means of installment payments secured by a deed of trust on their home. The contractor sold the note to Investors. When the contractor failed to perform its duties adequately under the contract, Mahaffey refused to make any payments, and the foreclosure proceeding was instituted by Investors.

The district court found that the signing of the contract was fraudulently induced but denied an injunction against the foreclosure on the basis of estoppel. Based on substantial evidence in the record, the court declared the contract null and void by virtue of fraudulent inducement and failure of consideration. The court reversed the judgment in favor of respondent based on equitable estoppel as unsubstantiated.

Investors was made award of the unfinished condition of appellants' home before it bought the note. Though its representative assured Mahaffey that the work would be completed, the work was never finished. Investors refused to pursue recourse against the contractor, as it had a legal right to do, and chose instead to institute the foreclosure proceeding.

The court declared the contract for home improvements null and void by virtue of fraudulent inducement and failure of consideration. The court reversed and remanded the judgment which denied an injunction against the foreclosure of Mahaffey's home because the same was premised on an unsupported claim of equitable estoppel in view of respondent mortgage corporation's course of conduct and the underlying fraudulent scheme.